Government Takes Aim At Credit Cards

June 23, 2000|By Melissa Wahl, Tribune Staff Writer.

For people who come home each day to a mailbox full of credit card solicitations, it may seem bizarre that the Justice Department is suing the industry, saying there's not enough competition. More than half a billion cards are circulating in the United States, and some issuers now offer introductory rates with 0 percent interest.

Still, the government's antitrust lawyers--fresh from their victory over Microsoft Corp.--are battling Visa U.S.A. and MasterCard in a New York court, saying consumers have been cheated of the fruits of competition by the two non-profit networks, which are owned and operated by the nation's banks.

The result, the Justice Department alleges in its 1998 lawsuit, was not necessarily higher prices on the cards themselves, but a lack of innovation. Its lawyers use smart cards as an example of how technological advancements have been held hostage because of the coziness between Visa and MasterCard. Some experts say that relationship also led to higher costs for merchants, which ultimately hurt consumers.

Together, Visa and MasterCard have more than 75 percent of the U.S. card market, and they prohibit banks that issue their cards from issuing cards with other brands, such as American Express and Discover.

It's not the first time the government has been concerned about how the credit card industry operates; in the 1970s, the government told Visa to allow MasterCard to do business with Visa-issuing banks. The networks--whose boards and governing committees include executives from the same banks--now want to lock out other competitors, which the Justice Department considers collusion.

For their part, the card giants insist they are fierce competitors. And they say there is no U.S. market for smart cards, which carry a computer chip that can store everything from health records to electronic money.

If the government prevails, Visa and MasterCard might have to unwind their boards and governing committees. They also could lose the ability to demand that their bank customers deal only with them.

American Express is thrilled with the prospect that its competitors might lose their exclusive relationships with banks.

But Discover, the fourth-largest player, feels left out. Last week, the Justice Department cut Discover executives from its witness list, leaving them wondering why the government's case seems so focused on American Express.

Although the case has potentially far-reaching implications, its effects on consumers are somewhat subtle. Individual banks set their own credit card interest rates, which tend to be quite competitive. And few cards have annual fees anymore, unless they are attached to frequent flier or other awards programs.

"It's hard to imagine more competition than you have now at the issuer level, except maybe paying people to carry credit cards," said Robert McKinley, chief executive of CardWeb.com, a credit card research firm.

But consumer advocates and Discover officials say there are pricing issues elsewhere in the industry. For each credit card sale they make, merchants have to pay a portion to the credit card companies, a cost passed on to consumers. Rates at American Express are highest.

If American Express is allowed to compete for banks' credit card business but no change is made to merchant pricing, that card could be more attractive to banks looking for fee income. If banks channeled more customers to the American Express card, then merchants and consumers could pay more.

"Justice should be focused on pricing. That's the issue that keeps us at bay," said David Nelms, president of Discover, a Riverwoods-based unit of Morgan Stanley Dean Witter & Co. that has low merchant pricing.

The Justice Department declined to comment on the pricing issue.

Ed Mierzwinski at the U.S. Public Interest Research Group in Washington says merchants' prices would be lower if Visa and MasterCard did not work so closely.

"There are a lot of complaints that merchants are being gouged to be in the Visa/MasterCard networks," he said.

It is also possible that prices could go up as a result of the Justice Department suit, said Pete Hisey, editor of Credit Card News. "If they win the collusion part, I think it's a disaster for the consumer," he said.

No one knows what remedy the court would require, but if it were the extreme measure of unwinding the Visa and MasterCard networks, the cost would be "billions and billions of dollars," Hisey said. "You'd see much higher rates on cards, and it could wipe out MasterCard, the smaller of the two networks."

But the Justice Department has largely avoided the issue of pricing in its lawsuit.

The government instead is attacking what it considers a lack of innovation at Visa and MasterCard, whose relationship it says has kept smart cards and other new products from flourishing in the United States.